Canadian households are feeling the pinch of rising interest payments. The debt service ratio, a measure of how much household income is going towards servicing principal and interest payments, ticked higher in Q4 2018. The debt service ratio topped a record high of 14.9% last quarter.

Canada debt service ratio
Source: Capital Economics

The Canadian debt story is well known, and has gone on much longer than anticipated, much to the chagrin of short sellers hoping to capitalize on the painful knock-on effects when a consumer deleverages, as they did in the US during the 2008 financial crisis. Today the US consumer has largely recovered, and the debt service ratio for households sits at record lows of just 9.8%.

US debt service ratio
US debt service ratio

Yet the balance sheet of Canadian households continues to defy gravity. There are however, early signs that a household contraction is underway. Household consumption slowed to 0.7% in Q4, the weakest pace of growth since 2012. Meanwhile, the pace of household credit growth has slumped to its slowest pace since the 1980’s. This is particularly ominous considering the unemployment rate remains at a 40 year low.

Mortgage loan growth remains weak, particularly in Alberta & Saskatchewan where job prospects are rather discouraging. The year-over-year change in total mortgages has actually turned negative.

Mortgage loan growth
Source: First Foundation Mortgage

Thus, it should be no surprise the Bank of Canada has slammed the brakes on future rate hikes while announcing their plan to begin purchasing Canadian mortgage debt. While the banks maintains it is simply a move to diversify its assets, the timing remains rather intriguing.


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